Implied volatilities collapsing

Implied volatilities has collapsed in FX and Equities. Fixed income volatilities are still holding up due to the TARP programme forcing down long end yields. This combined with end of year cash flows has created a strong momentum in the bondmarkets with US 10 year yields falling to the extremely low level of 2.67%.
This is a bullish signal and will lure investors into the market short term.

On top of that, Bill Gross at PIMCO yesterday concluded that there is a "bubble element" in the TBill market as yields hit zero yesterday at the treasury 3 month auction. (30 Bn Usd was issued at 0% yield).

Look out for near term flows moving out of TBills and bonds into more risky assets. Watch the 10 year yields. Such an event would create implied volatility spikes in the fixed income markets as this is by no means priced in. Effects on the Equity and Fx market could be swift pro risk moves. (Higher Equities, lower Usd, stronger risk currencies) with vols coming off. Long gamma, short vega, should be the non Fixed Income vol play in such a scenario.

Oil rebound could be in the works as well, benefitting the RUB, NOK and CAD.
With all these bullish signals I will be long Equities, short the Usd, short term.
However, will also use it to reposition for another bearish wave development post it.

Morgan Stanleys very bearish depression report published this morning has not caused any massive falls in the market, indicating the market sentiment is still to shrug off bad news and focus on the positive ones, lowering implied volatility in the process.

There is one area that is still a big concern and it is spelled Emerging markets.
Check out Eur/Pln. Pln is weakening as we speak, and has done so for the last week, despite these bullish signals. Something to be concerned about despite the current positive sentiment.







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